Anna Victoria Couri, King’s College London exchange student and ESSEC Business School Runner-up in the Council’s 2021 student CSR competition, looks at ESGs and how to render impact initiatives effective and true.
ESGs and impact investing: Moral Money – The Good, the Bad and the Ugly. By Anna Victoria Couri.
The sudden rise in so-called impact initiatives, mostly through environmental, social and governance labels (ESG), and the creative minds of corporations, is progressively revamping our perception of priorities as citizens, consumers and investors.
Today, over 58% of companies in the S&P 500 index publish sustainability reports. As worry widens about climate change, social integrity and ethics in business, people are awakening to the impact of their consuming choices. They are ascertaining that the way they splurge is as likely (or even more) to echo on the environment than the way they vote.
However, with a plethora of lingo and yet no digestible criteria, consumers are being fed terms such as green finance, impact investing and socially responsible finance. How to navigate the world of ESG and achieve a fair compromise?
Moral Money – The Good, the Bad and the Ugly: Value is king
Beyond profit, what makes us tick? Between traditional beliefs and new technologies, the intra-disciplinary term “value” has as many definitions as there are beliefs and communities. The Scandinavian philosophy “lagom” describes value as living in perfect balance, promoting an ecologically responsible mindset and collective accountability. On the other side of the globe, the Native American Navajo place the highest value on sharing what they own – of course, the gifts are without expectations. Value for the greater good means creating value for all stakeholders: clients, investors, employees, communities, future generations and the environment.
How can this be achieved in the realm of global finance? The notion of Socially Responsible Investing (SRI) refers to investment strategies whereby investors aim to align ESG concerns with their financial goals. Although not formally known as SRI, this strategy has been around for a while; SRI has evolved alongside the global political climate since the 1920s and has shaped the modern era as we know it. Fast forward to the 1960s, the Vietnam War, human, civil rights and labour issues were concerns that socially conscious investors sought to address. Among all the worthwhile stories with respect to SRI, the end of Apartheid in South Africa was paramount to success. However, it was easier then because there were no scientific theses to defend. Nowadays, SRI must be integrated into many calculations and chain-events that are intricate to quantify impact.
Demystifying the three problems with social investing
The scope of social investing encompasses clear-cut tenets such as sustainable and responsible investing (SRI), impact investing, triple bottom line investing (TBL) – People, Planet, Profit –, “green” or ethical investing and many more. However, these investment strategies can be problematic:
- Problem 1: SRI narrowly refers to practices that aim to avoid social and environmental damage through the sole use of negative screening of companies that engage in detrimental activities. But ruling out prodigal companies isn’t enough – this “half-impact” approach fails to take into account positive criteria devised to seek companies engaging in sustainable practices, such as clean technologies. According to investor Amy Domini, shareholder advocacy and community investing are the foundations of SRI and the use of negative screening is meagre in “high impact” investing.
- Problem 2: The proliferation of shades of green in sustainability is misleading. As new accounting measures calculating the ‘carbon footprint’ or greenhouse gases (GHG) emission are putting companies under growing pressure to decarbonise, the EU Emissions Trading System (2005), has put into practice the principle that the polluter should pay through the “cap & trade” scheme. However, this mechanism is not necessarily regenerative; in fact, carbon credits are being created from carbon sequestrations that already exist (just not previously accounted for), thus, creating more wealth for intermediaries, like brokers, and not providing the actual impact society expects when one reads an investment teaser labelled “green bond”, or buys a product sold as “carbon neutral”.
At the end of the day, the real impact on the environment is bound by the structural inequalities between the small and big players on the market. Larger companies have the means for buying-out smaller-scale ones, inevitably forging a free-pass for firms to continue polluting and thus fuelling the unevenness between companies. Subsequently, this makes us wonder if regulating the carbon market is the appropriate apparatus to undertake the climate challenge?
- Problem 3: How do we measure the impact of our money? There is no universal standard method for calculating impacts in ESG. Sustainability reporting should be subjected to the same level of scrutiny as financial reporting; the lack of consistent ESG reporting makes it difficult for us, consumers, and investors, to assess companies even when they report ESG performance. This inconsistency is reflected in the rating system – often based on business models rather than businesses themselves. As long as the business operations are sustainable, the products sold do not matter.
Indeed, it is exceedingly difficult to come up with a global standard to ESG impacts in everyday items, because in different geographies the cost of adapting to lower GHG is prohibitive. For instance, the forest code in Brazil states that only 50% of private agriculture-ready land can be ploughed because of the biome in which they are located. Should consumers be forced to pay a premium for that crop, compared to the same crop grown in the US where there is no forest code, or simply force farmers to make do with a lower income? So, for the sake of stricter environmental compliance, must social welfare suffer? In effect, achieving a compromise is easier said than done.
As consumers, how do we address this issue? On the one hand, a company’s ultimate objective is to increase shareholder value and make profit. On the other hand, per the universal law of supply and demand, companies respond to demand. Perhaps the compelling revolution we are all waiting to witness starts in our own choices. We tend to have short memory and easily move on from corporate scandals, but this needs to change. If demand changes, won’t companies follow the lead?
Don’t fall for the greenwashing trap!
“Nowadays, every second fund is claiming it is in some way sustainable”, says Marcus Björksten, manager of Europe’s best-performing sustainable fund. 78% of asset owners incorporate ESG criteria in their investment strategies and a growing number of funds are rebranding to ESG. Nonetheless, many funds marketed on their green credentials still invest in fossil fuels. ESG has become part of mainstream marketing – without some way to police the way it is used, ESG risks being reduced to a marketing strategy.
Corporations believe they can “wipe their carbon slate clean” by planting trees. They claim to balance their carbon equation through their state-of-the-art sustainable commitments in hopes to even out their unscrupulous behaviour. Such phenomenon sheds light upon the shortcomings of the Framing Effect; this bias occurs when our decisions are influenced by the way information is presented. When shopping, people like to think they are doing “the right thing” – and greenwashing appears to be an updated rendition of such bias, one that is inherent to the capitalist mode of production. In the 2000s, McDonald’s switched their logo colour from red to green: this is a simple but powerful illustration of how companies exploit heuristics biases of consumers.
While “wiping the carbon slate” is already knotty, doing so in line with labour rights seems to be all the more onerous. Known for popular chocolate goodies like Butterfinger and Crunch, Nestlé alleges to be ending child labour. The food giant designed the Nestle Cocoa Plan to address the root causes of child labour in West Africa. Conversely, a 2019 class-action lawsuit against Nestle claims their “sustainably sourced cocoa beans” are no such thing, quite the opposite: Nestle is allegedly blamed for the substantial deforestation. After all, one can’t just be committed to positive impact, one must also appear committed. The crux of the problem is that companies only have soft and often self-imposed limits – evidencing the real lack of hard rules on ESG.
The deed needs to be done
Unfortunately, ESG is still perceived by a great number of organisations as a factor independent of commercial success, yet they are an integral part of the creation of value and competitive advantage. More than focusing on the social and commercial span, efforts should be directed to innovation and growth.
Alternatively, fostering an environment in which companies can concede their missteps as well as trumpet their success has never been more crucial – such is the imperativeness of the environmental crisis. If we continue to pour scorn on those who dare fail, the innovation and boldness necessary to move forward in Corporate Social Responsibility runs the risk of relapsing in a hostile environment.
Recently, the food and beverage multinational corporation Danone, pledged to commit to more sustainable practices, yet, current activist CEO Emmanuel Faber was ousted for his “questionable allocation choices”. Indeed, Danone is perceived to have failed to meet its financial targets by putting people and the planet before profit. One must ask again then: are we consumers and investors prepared to eventually have lower capital returns counterbalanced by greater impact. And if so, are governments ready to provide incentives, like income tax breaks, to alleviate the burden in doing so?
A shift in the ecosystem: a fair bargain for all
More than ever, the European Commission is pushing to fund the green transition with regulations striving for greater transparency. One of the pillars of the EU’s Green Deal is the decree for companies and funds to disclose all ESG risks. This is good news not only for investment professionals, but for us, consumers, who inspect food labels for nutrients and origin before adding products to our carts.
In line with TBL is the initiative UN Global Compact (2000), setting forth 10 guiding principles around the matters of human rights, environment protection and anti-corruption. Annually, participants are invited to confer the way governments, corporations, and non-profits can cooperate better in order to tackle the challenges of sustainable development. However, the Compact is non-binding and is used as a public relation tool rather than spurring change. Should these guiding principles develop into regulation, this would be the commencement of a new era for capitalism.
For better or for worse, technology is here to stay and is pivotal to upturning the environmental crisis. Sam Altman, CEO of OpenAI: “A great future isn’t complicated: we need technology to create it and policy to fairly distribute it”. It is crystal clear that we are equipped with the former and it is now in our hands to conceive the latter. 2020 has proven to be a decisive year in the technological breakthrough of clean-tech. Across all sectors, clean-tech companies are responding to the challenges of sustainability for the sake of traceability of supply-chain, collaborative economy, and biotechnologies to increase the shelf-life of food and avoid the level of waste occurring in the Western society.
Ultimately, a new spirit of ESG is on its way as regulation tightens and awareness raises, enabling the creation of value for all parties involved – us citizens, clients, investors and the environment. But to do more for other stakeholders, executives need to change the rules of corporate governance and politicians need to change international regulation. The success of a green capitalism and a better future depend on this accord.
- Link up with Anna Victoria Couri via LinkedIn
- Read this article and others in Global Voice magazine special issue #18.
- Read a related article: The What and Why of Sustainable Finance.
- Discover ESSEC Business School France–Singapore–Morocco
- Study a GMBA or an EMBA at ESSEC Business School
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